Business combinations and goodwill

A business combination is a transaction in which an acquirer obtains control of a business (IFRS 3; control is defined in IFRS 10). Since the 2018 amendments, a business must include at least an input and a substantive process that together significantly contribute to the ability to create outputs; an optional concentration test lets an entity conclude quickly that an acquisition of what is essentially a single asset (or group of similar assets) isn't a business.

The acquisition method 1. Identify the acquirer and the acquisition date (when control passes). 2. Recognise and measure the identifiable assets acquired and liabilities assumed, generally at fair value at the acquisition date. This includes items the acquiree never recognised — internally generated brands, customer relationships, patents — and contingent liabilities that are present obligations, even if an outflow isn't probable. Exceptions include deferred tax (IAS 12), employee benefits (IAS 19) and leases where the acquiree is lessee (IFRS 16). An assembled workforce is not identifiable; its value is part of goodwill. The acquirer's own planned restructuring isn't a liability of the acquiree. 3. Measure the non-controlling interest (NCI). For each combination, choose: fair value (often from the share price), giving "full" goodwill, or the NCI's proportionate share of identifiable net assets, giving "partial" goodwill. 4. Recognise goodwill or a gain on a bargain purchase:

Goodwill = consideration transferred + NCI + fair value of any previously held interest − fair value of identifiable net assets.

Consideration is measured at fair value: cash, shares issued (at their fair value, not nominal value), and contingent consideration at its acquisition-date fair value. Acquisition-related costs (advisers, legal, valuation fees) are expensed as incurred; costs of issuing debt or equity follow IFRS 9 / IAS 32.

If the result is negative, the acquirer first reassesses whether it has identified and measured everything correctly. Any remaining excess is a bargain purchase gain in profit or loss at the acquisition date.

Contingent consideration after the acquisition date. An earn-out classified as a financial liability is remeasured to fair value at each reporting date, with changes in profit or loss — goodwill isn't adjusted, unless the change is a measurement-period adjustment reflecting facts that existed at the acquisition date. An earn-out classified as equity isn't remeasured. So a seller's business that outperforms its earn-out target produces a loss for the acquirer — a frequent surprise for boards.

When control is achieved in stages, the previously held interest is remeasured to fair value, with any gain or loss in profit or loss, and that fair value enters the goodwill calculation. Provisional amounts can be adjusted during the measurement period (up to one year) for information about facts that existed at the acquisition date.

Goodwill isn't amortised. It is tested for impairment at least annually (IAS 36). The IASB's Business Combinations — Disclosures, Goodwill and Impairment project (exposure draft March 2024) was still being redeliberated in 2026 and hasn't changed these requirements.